NEKTAR THERAPEUTICS

NKTR
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NEKTAR THERAPEUTICS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/07/2020 | 06:14am


The following discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to those discussed in this section as well as
factors described in Part II, Item 1A "Risk Factors."
Overview
Strategic Direction of Our Business
Nektar Therapeutics is a research-based biopharmaceutical company that discovers
and develops innovative new medicines in areas of high unmet medical need. Our
research and development pipeline of new investigational drugs includes
treatments for cancer and autoimmune disease. We leverage our proprietary and
proven chemistry platform to discover and design new drug candidates. These drug
candidates utilize our advanced polymer conjugate technology platforms, which
are designed to enable the development of new molecular entities that target
known mechanisms of action. We continue to make significant investments in
building and advancing our pipeline of proprietary drug candidates as we believe
that this is the best strategy to build long-term stockholder value.
In immuno-oncology (I-O), we are executing a clinical development program for
bempegaldesleukin (previously referred to as NKTR-214), in collaboration with
Bristol-Myers Squibb Company (BMS) as well as other independent development work
evaluating bempegaldesleukin in combination with other agents with potential
complementary mechanisms of action. We announced in August of 2019 that the FDA
granted a Breakthrough Therapy designation for bempegaldesleukin in combination
with Opdivo® for the treatment of patients with untreated unresectable or
metastatic melanoma. We expect our research and development expense to continue
to grow over the next few years as we expand and execute our broad clinical
development program for bempegaldesleukin.
On January 9, 2020, we and BMS entered into an Amendment No. 1 (the Amendment)
to the Collaboration Agreement. dated February 13, 2018 (the BMS Collaboration
Agreement). Pursuant to the Amendment, we and BMS agreed to update the
Collaboration Development Plan under which we are collaborating and developing
bempegaldesleukin. Specifically, pursuant to the updated Collaboration
Development Plan, bempegaldesleukin in combination with Opdivo® is currently
being evaluated in ongoing registrational trials in first-line metastatic
melanoma, first-line cisplatin ineligible, PD-L1 low, locally advanced or
metastatic urothelial cancer, first-line metastatic renal cell carcinoma (RCC),
and muscle-invasive bladder cancer, and also includes an additional
registrational trial in adjuvant melanoma, as well as a Phase 1/2 dose
escalation and expansion study to evaluate bempegaldesleukin plus Opdivo® in
combination with axitinib in first line RCC in order to support a future Phase 3
registrational trial. Several other registrational-supporting pediatric and
safety studies for the combination of bempegaldesleukin and Opdivo® are either
currently underway or planned to begin in 2020. Also, as specifically allowed
under the BMS Collaboration Agreement, Nektar is independently studying
bempegaldesleukin and pembrolizumab in a non-small cell lung cancer (NSCLC)
Phase 1/2 trial.
The Amendment did not alter the cost-sharing methodology under the BMS
Collaboration Agreement. The parties share development costs based on each
party's relative ownership interest in the compounds included in the regimen.
For example, we share clinical development costs for bempegaldesleukin in
combination with Opdivo®, BMS 67.5% and Nektar 32.5%. For costs of manufacturing
bempegaldesleukin, however, BMS is responsible for 35% and Nektar is responsible
for 65% of costs. BMS supplies Opdivo® free of charge. We also share
commercialization related costs, 35% BMS and 65% Nektar, which we present in
general and administrative expense. Our share of development costs is limited to
an annual cap of $125.0 million. To the extent this annual cap is exceeded, we
will recognize our full share of the research and development expense and BMS
will reimburse us for the amount over the annual cap which will be recorded as a
contingent liability. This contingent liability will be paid to BMS only if
bempegaldesleukin is approved and solely by reducing a portion of our share of
net profits following the first commercial sale of bempegaldesleukin.
The BMS Collaboration Agreement entitles Nektar to receive up to $1.455 billion
of clinical, regulatory and commercial launch milestones. These milestones
include development milestones of a $25.0 million non-refundable, creditable
milestone payment following the achievement of the first-patient, first-visit
milestone in the registrational muscle-invasive bladder cancer trial (achieved
in January 2020) and a $25.0 million non-refundable, non-creditable milestone
payment following the achievement of the first-patient, first-visit milestone in
the registrational adjuvant melanoma trial. Of the remaining milestones, $625.0
million
are associated with the approval and launch of bempegaldesleukin in its
first indication in the U.S., EU and Japan (which reflects the reduction for the
$25.0 million nonrefundable, creditable milestone for the first patient, first
visit in the muscle-invasive bladder cancer trial that BMS paid to us in March
2020
). As a result, whether and when bempegaldesleukin is approved in any
indication will have a significant impact on our future results of operations
and financial condition.
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Outside of the collaboration development plan with BMS, we are conducting and
pursuing additional research and development activities evaluating
bempegaldesleukin in combination with other agents that have potential
complementary mechanisms of action. Our strategic objective is to establish
bempegaldesleukin as a key component of many I-O combination regimens with the
potential to enhance the standard of care in multiple oncology settings. With
our non-BMS clinical collaborations for bempegaldesleukin, we generally share
clinical development costs on a substantially pro-rata basis commensurate with
our ownership interest in the underlying compounds. We expect to continue to
make significant and increasing investments exploring the potential of
bempegaldesleukin with mechanisms of action that we believe are synergistic with
bempegaldesleukin based on emerging scientific findings in cancer biology and
preclinical development work.
We are also advancing other molecules, including NKTR-262 and NKTR-255, in our
I-O portfolio. NKTR-262 is a small molecule agonist that targets toll-like
receptors (TLRs) found on innate immune cells in the body. NKTR-262 is designed
to stimulate the innate immune system and promote maturation and activation of
antigen-presenting cells (APCs), such as dendritic cells, which are critical to
induce the body's adaptive immunity and create antigen-specific cytotoxic T
cells. NKTR-262 is being developed as an intra-tumoral injection in combination
with systemic bempegaldesleukin in order to induce an abscopal response and
achieve the goal of tumor regression in cancer patients treated with both
therapies. The Phase 1/2 dose-escalation and expansion trial of NKTR-262 in
patients with solid tumors is currently ongoing. NKTR-255 is a biologic that
targets the interleukin-15 (IL-15) pathway in order to activate the body's
innate and adaptive immunity. Activation of the IL-15 pathway enhances the
survival and function of natural killer (NK) cells and induces survival of both
effector and CD8 memory T cells. Preclinical findings suggest NKTR-255 has the
potential to synergistically combine with antibody dependent cellular cytoxicity
molecules as well as enhance CAR-T therapies. We have initiated a Phase 1
clinical study of NKTR-255 in adults with relapsed or refractory non-Hodgkin
lymphoma or multiple myeloma. We also plan to initiate a Phase 1 study for
NKTR-255 in solid tumor settings this year.
In immunology, we are developing NKTR-358, which is designed to correct the
underlying immune system imbalance in the body that occurs in patients with
autoimmune disease. NKTR-358 is designed to optimally target the IL-2 receptor
complex in order to stimulate proliferation and growth of regulatory T cells.
NKTR-358 is being developed as a once or twice monthly self-administered
injection for a number of autoimmune diseases. In 2017, we entered into a
worldwide license agreement with Eli Lilly and Company (Lilly) to co-develop
NKTR-358. We received an initial payment of $150.0 million in September 2017 and
are eligible for up to an additional $250.0 million for development and
regulatory milestones. We are responsible for completing Phase 1 clinical
development and certain drug product development and supply activities. We also
share Phase 2 development costs with Lilly, with Lilly responsible for 75% and
Nektar responsible for 25% of these costs. We will have the option to contribute
funding to Phase 3 development on an indication-by-indication basis, ranging
from zero to 25% of the Phase 3 development costs. Lilly will be responsible for
all costs of global commercialization and we will have an option to co-promote
in the U.S. under certain conditions.
We have completed a Phase 1 dose-finding trial of NKTR-358 to evaluate
single-ascending doses of NKTR-358 in approximately 100 healthy patients.
Results from this study demonstrated a multiple-fold increase in regulatory T
cells with no change in CD8 positive or natural killer cell levels and no
dose-limiting toxicities were observed. We also completed treatment of a Phase 1
multiple-ascending dose trial to evaluate NKTR-358 in patients with systemic
lupus erythematosus (SLE). Lilly is expected to initiate a Phase 2 study in SLE
in mid-2020 and to start an additional Phase 2 study in another auto-immune
disease in 2020. These clinical studies are in addition to the two Phase 1b
studies in patients with psoriasis and atopic dermatitis being run by Lilly.
We were developing NKTR-181 for the treatment of chronic low back pain in adult
patients and had submitted an NDA for NKTR-181. At the FDA advisory committee
meeting held on January 14, 2020, the joint FDA Anesthetic Drug Products
Advisory Committee
and Drug Safety and Risk Management Committee did not
recommend approval of NKTR-181, and, as a result, we withdrew the NDA and
decided to make no further investment commitments to this program.
The level of our future research and development investment will depend on a
number of trends and uncertainties including clinical outcomes, future studies
required to advance programs to regulatory approval, and the economics related
to potential future collaborations that may include up-front payments,
development funding, milestones, and royalties. Over the next several years, we
plan to continue to make significant investments to advance our early drug
candidate pipeline.
We have historically derived all of our revenue and substantial amounts of
operating capital from our collaboration agreements including the BMS
Collaboration Agreement, pursuant to which we have recognized $1.11 billion in
revenue and recorded $790.2 million in additional paid in capital for shares of
our common stock issued in the transaction. While in the near-term we continue
to expect to generate substantially all of our revenue from collaboration
arrangements, including the potential remaining $1.405 billion in development
and regulatory milestones under the BMS collaboration, in the medium- to
long-term, our plan is to generate significant commercial revenue from
proprietary products including bempegaldesleukin. Since we do not
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have experience commercializing products or an established commercialization
organization, there will be substantial risks and uncertainties in future years
as we build commercial, organizational, and operational capabilities.
We also receive royalties and milestones from two approved drugs. We have a
collaboration with AstraZeneca for MOVANTIK®, an oral peripherally-acting
mu-opioid antagonist for the treatment of opioid-induced constipation in adult
patients with non-cancer pain which was approved by the FDA and subsequently
launched in March 2015 and MOVENTIG®, for the treatment of opioid-induced
constipation in adult patients who have an inadequate response to laxatives,
which was approved by health authorities in the European Union and many other
countries beginning in 2014. We also have a collaboration with Baxalta Inc. (a
wholly-owned subsidiary of Takeda Pharmaceutical Company Ltd.) for ADYNOVATE®,
that was approved by the FDA in late 2015 for use in adults and adolescents,
aged 12 years and older, who have Hemophilia A. ADYNOVI™ was approved by health
authorities in Europe in January 2018, and has also been approved in many other
countries.
Our business is subject to significant risks, including the risks inherent in
our development efforts, the results of our clinical trials, our dependence on
the marketing efforts by our collaboration partners, uncertainties associated
with obtaining and enforcing patents, the lengthy and expensive regulatory
approval process and competition from other products. For a discussion of these
and some of the other key risks and uncertainties affecting our business, see
Item 1A. Risk Factors.
While the approved drugs and clinical development programs described above are
key elements of our future success, we believe it is critically important that
we continue to make substantial investments in our earlier-stage drug candidate
pipeline. We have several drug candidates in earlier stage clinical development
or being explored in research that we are preparing to advance into the clinic
in future years. We are also advancing several other drug candidates in
preclinical development in the areas of I-O, immunology, and other therapeutic
indications. We believe that our substantial investment in research and
development has the potential to create significant value if one or more of our
drug candidates demonstrates positive clinical results, receives regulatory
approval in one or more major markets and achieves commercial success. Drug
research and development is an inherently uncertain process with a high risk of
failure at every stage prior to approval. The timing and outcome of clinical
trial results are extremely difficult to predict. Clinical development successes
and failures can have a disproportionately positive or negative impact on our
scientific and medical prospects, financial condition and prospects, results of
operations and market value.

Effects of the COVID-19 Pandemic
During the first quarter of 2020, a novel strain of coronavirus (SARS-CoV-2)
that was first identified in Wuhan, China spread to other countries. In March
2020
, COVID-19, the disease resulting from coronavirus infection, was declared a
global pandemic. Many countries, including the United States and India, have
taken steps to slow or moderate the spread of the virus. These steps include,
among others, restricting travel, closing schools, and issuing shelter-in-place
orders. It remains unclear how long these measures will remain in place and
whether these measures will be effective.
Currently, with respect to the operation of our facilities, we are closely
adhering to applicable guidelines and orders. Essential operations in research,
manufacturing and maintenance that occur within our facilities are continuing in
accordance with the permissions granted under government ordinances. Across all
our locations, we have instituted a temporary work from home policy for all
office personnel who do not need to work on site to maintain productivity. At
this time, we have not identified a material change to our productivity as a
result of these measures, but this could change, particularly if restricted
travel, closed schools, and shelter-in-place orders are not removed or
significantly eased.
The safety and well-being of our employees, and the patients and healthcare
providers in our clinical trial programs, are of first and foremost importance
to us. We believe that the safety measures we are taking and instructing our
contractors to take in response to the COVID-19 pandemic meet or exceed the
guidance and requirements issued from government and public health officials.
We and our partners are currently engaged in the clinical testing of our
proprietary drug candidates and the COVID-19 pandemic introduces significant
challenges to our clinical development programs which are central to our
business. The evolving situation around the COVID-19 pandemic, along with the
resulting public health guidance measures that have been put into place, have
thus far had varying impacts on the clinical testing of our proprietary drug
candidates depending on the therapeutic indication, geographic distribution of
clinical trial sites, the clinical trial stage, and, in certain cases, our
partners' general corporate approach to the COVID-19 pandemic. The rapid
development and fluidity of the COVID-19 pandemic precludes any firm estimates
as to the ultimate effect this disease will have on our clinical trials, our
operations and our business. As a result, any current assessment of the effects
of the COVID-19 pandemic, including the impact of this disease on our specific
clinical programs as discussed below, is difficult to predict and subject to
change.
Specifically, for the ongoing registrational clinical trials studying the
combination of bempegaldesleukin and Opdivo® in cancer indications being led by
Nektar (such as RCC and first-line cisplatin ineligible, PD-L1 low, locally
advanced or metastatic urothelial cancer), although we have not seen evidence to
date that the COVID-19 pandemic has had a significant impact on
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enrollment for these trials, the future impact of the COVID-19 pandemic on these
trials is very difficult to predict and, with regard to individual clinical
trial sites within these studies, will likely vary by the geographic region in
which they are located.
For Nektar's Phase 1/2 trial studying bempegaldesleukin and pembrolizumab in
NSCLC, the COVID-19 pandemic delayed the initiation of certain investigator
sites in Europe. More recently, however, we have made progress against our plans
to initiate investigator sites in certain European countries and other
locations. Based on present estimates, we currently expect to have initial
safety as well as preliminary overall response rate data for an initial set of
patients in the dose-escalation and NSCLC cohorts of this study by the end of
2020 or the first quarter of 2021.
With regard to Nektar's ongoing clinical studies of NKTR-262 (the Phase 1/2
REVEAL study) and NKTR-255, these studies have thus far largely remained on
track although we have experienced some challenges with new investigator site
initiations. Nonetheless, the ongoing COVID-19 pandemic could still impact the
timely completion of these studies by approximately three months.
For clinical studies of our proprietary drug candidates being run by our
partners, BMS previously announced in March 2020, that due to the COVID-19
pandemic, it had continued enrolling at existing investigator sites that had
previously established remote monitoring capability, but paused initiation of
new investigator sites for all of its studies, which include the first-line
melanoma study and the muscle-invasive bladder cancer study, both evaluating the
combination of bempegaldesleukin and Opdivo®. More recently, BMS indicated it
has re-started enrollment activities and initiation of new investigator sites.
BMS recently extended their timeline estimates by approximately six months for
the first data read-outs for the first-line melanoma trial. We will continue to
monitor the progress of the BMS-led studies. Our partner Lilly, which is running
clinical trials of NKTR-358, temporarily suspended recruitment for the ongoing
Phase 1b studies in atopic dermatitis and psoriasis as a result of the COVID-19
pandemic. For these trials, we will have likely delays of at least three to six
months. Lilly continues to project Phase 2 study starts in the second half of
2020 in moderate to severe lupus patients and another undisclosed auto-immune
disease indication. The rapid development and fluidity of the COVID-19 pandemic
preclude any firm estimates as to the ultimate effect this disease will have on
collaborator's clinical trials. As a result, there remains substantial
uncertainty as to potential impacts on our collaboration partner studies.
With regard to our IND-enabling research, although the COVID-19 pandemic has
caused us to reduce the number of employees working at our sites, a subset of
our research-based employees continues to conduct laboratory work in our
research facilities (which is permitted under the applicable government
ordinances). As a result, we continue to make progress in the identification of
new drug candidates.
In an effort to mitigate the negative effects of the COVID-19 pandemic on our
clinical trials (both in terms of clinical trial timelines and integrity of
clinical study data), we have taken steps to help our clinical trial
investigators and their teams continue to provide care and uninterrupted access
to their patients. Particularly, in the context of our clinical trials directed
to investigational cancer treatments, for example, we are actively working with
our study sites to implement measures to prevent study protocol violations, to
minimize any disruption of treatment visits, to accommodate for patient visit
delays caused by limited access to healthcare facilities, to leverage
alternative methods for maintaining clinical trial integrity, and to properly
record patient event data that may be influenced by the COVID-19 pandemic. In
addition, to the extent that the integrity of individual patient data is
negatively affected by the COVID-19 pandemic, we will consider measures to
maintain the integrity of the clinical study overall (such as over-enrolling
patients into the study and removing all patients originating from an affected
study site when performing statistical analyses of study endpoints). Although
these measures may have the benefit of preserving the overall integrity of a
clinical study, implementing these measures could result in a delay in
completing the study.
In this respect, we are also incorporating recent direction and flexibility
provided by regulatory authorities, including the United States Food and Drug
Administration
in its March 18, 2020 Guidance (most recently updated July 2,
2020
) entitled "FDA Guidance on Conduct of Clinical Trials of Medicinal Products
during COVID-19 Public Health Emergency." This Guidance is continually being
updated by FDA and updates can be found on the FDA's website at www.fda.gov. In
addition, we may refer to guidance documents from other regulatory agencies,
such as, for example, the European Medicines Agency's "Implications of
coronavirus disease (COVID-19) on methodological aspects of ongoing clinical
trials" found on www.ema.europa.eu, which are also continually being updated.
With respect to financing our near-term business needs, as set forth below in
"Key Developments and Trends in Liquidity and Capital Resources," we estimate we
have working capital to fund our current business plans through at least the
next twelve months.
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Key Developments and Trends in Liquidity and Capital Resources
We estimate that we have working capital to fund our current business plans
through at least the next twelve months. As of June 30, 2020, we had
approximately $1.2 billion in cash and investments in marketable securities. On
April 13, 2020, we repaid the principal and accrued interest of our senior notes
totaling $254.8 million. See Note 1 to our Condensed Consolidated Financial
Statements for additional information.
Results of Operations
Three and Six Months Ended June 30, 2020 and 2019
Revenue (in thousands, except percentages)
Increase/ Percentage Increase/
(Decrease) (Decrease)
Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Product sales $ 5,485 $ 4,346 $ 1,139 26 %
Royalty revenue 9,403 7,343 2,060 28 %
Non-cash royalty revenue related to sale
of future royalties 7,684 9,091 (1,407) (15) %
License, collaboration and other revenue 26,275 2,535 23,740 >100%
Total revenue $ 48,847 $ 23,315 $ 25,532 >100%



Increase/ Percentage Increase/
(Decrease) (Decrease)
Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Product sales $ 8,929 $ 8,744 $ 185 2 %
Royalty revenue 19,122 18,733 389 2 %
Non-cash royalty revenue related to sale
of future royalties 17,579 17,321 258 1 %
License, collaboration and other revenue 53,790 6,739 47,051 >100%
Total revenue $ 99,420 $ 51,537 $ 47,883 93 %


Our revenue is derived from our collaboration agreements, under which we may
receive product sales revenue, royalties, and license fees, as well as
development and sales milestones and other contingent payments. We recognize
revenue when we transfer promised goods or services to our collaboration
partners. The amount of upfront fees received under our license and
collaboration agreements allocated to continuing obligations, such as
development or manufacturing and supply commitments, is generally recognized as
we deliver products or provide development services. As a result, there may be
significant variations in the timing of receipt of cash payments and our
recognition of revenue. We make our best estimate of the timing and amount of
products and services expected to be required to fulfill our performance
obligations. Given the uncertainties in research and development collaborations,
significant judgment is required to make these estimates.
Product Sales
Product sales include predominantly fixed price manufacturing and supply
agreements with our collaboration partners and are the result of firm purchase
orders from those partners. The timing of shipments is based solely on the
demand and requirements of our collaboration partners and is not ratable
throughout the year.
Product sales were consistent for the six months ended June 30, 2020 as compared
to the six months ended June 30, 2019. We expect product sales for the full year
of 2020 to be lower than 2019. At this time, we do not anticipate that effects
of the COVID-19 pandemic will impact our product sales.
Royalty Revenue
We receive royalty revenue from certain of our collaboration partners based on
their net sales of commercial products. Royalty revenue for the six months ended
June 30, 2020 was consistent with the six months ended June 30, 2019. At this
time, we
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cannot estimate the effects of the COVID-19 pandemic on the net sales of the
commercial products of our collaboration partners and our resulting royalty
revenues.
Non-cash Royalty Revenue Related to Sale of Future Royalties
For a discussion of our Non-cash royalty revenue, please see our discussion
below "Non-Cash Royalty Revenue and Non-Cash Interest Expense."
License, Collaboration and Other Revenue
License, collaboration and other revenue includes the recognition of upfront
payments, milestone and other contingent payments received in connection with
our license and collaboration agreements and certain research and development
activities. The level of license, collaboration and other revenue depends in
part upon the achievement of milestones and other contingent events, the
continuation of existing collaborations, the amount of our research and
development services, and entering into new collaboration agreements, if any.
During the three months ended March 31, 2020, we recognized $25.0 million in
license, collaboration and other revenue for the achievement of the first
patient, first visit in the registrational muscle-invasive bladder cancer trial
under the BMS Collaboration Agreement. During the three months ended June 30,
2020
, we recognized $25.0 million in license, collaboration and other revenue
for the milestone for the first patient, first visit in the registrational
adjuvant melanoma trial, also under the BMS Collaboration Agreement. Although we
did not achieve the first patient, first visit until July 27, 2020, in the
adjuvant melanoma trial, we concluded that a reversal of the milestone was not
probable as of June 30, 2020. As a result, license, collaboration and other
revenue increased during the three and six months ended June 30, 2020 as
compared to the three and six months ended June 30, 2019 due to the recognition
of these milestones. We expect that our license, collaboration and other revenue
will increase significantly in the full year of 2020 compared to 2019 as a
result of the recognition of these milestones.
The timing and future success of our drug development programs and those of our
collaboration partners are subject to a number of risks and uncertainties. See
Item 1A. Risk Factors for discussion of the risks associated with the complex
nature of our collaboration agreements.
Cost of Goods Sold and Product Gross Margin (in thousands, except percentages)
Increase/ Percentage Increase/
(Decrease) (Decrease)
Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Cost of goods sold $ 5,773 $ 5,018 $ 755 15 %
Product gross profit (288) (672) 384 (57) %
Product gross margin (5) % (15) %



Increase/ Percentage Increase/
(Decrease) (Decrease)
Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Cost of goods sold $ 9,584 10,458 $ (874) (8) %
Product gross profit (655) (1,714) 1,059 (62) %
Product gross margin (7) % (20) %



Our strategy is to manufacture and supply polymer reagents to support our
proprietary drug candidates or our third-party collaborators where we have a
strategic development and commercialization relationship or where we derive
substantial economic benefit. We have elected to only enter into and maintain
those manufacturing relationships associated with long-term collaboration
agreements which include multiple sources of revenue, which we view holistically
and in aggregate. We have a
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predominantly fixed cost base associated with our manufacturing activities. As a
result, our product gross profit and margin are significantly impacted by the
mix and volume of products sold in each period.
Product gross margin was negative for the three and six months ended June 30,
2020
and June 30, 2019. We have a manufacturing arrangement with a partner that
includes a fixed price which is less than the fully burdened manufacturing cost
for the reagent, and we expect this situation to continue with this partner in
future years. In addition to product sales from reagent materials supplied to
the partner where our sales are less than our fully burdened manufacturing cost,
we also receive royalty revenue from this collaboration. In the three and six
months ended June 30, 2020 and 2019, the royalty revenue from this collaboration
exceeded the related negative gross profit.
We expect product gross margin to continue to fluctuate in future periods
depending on the level and mix of manufacturing orders from our customers. We
currently expect product gross margin to be negative in 2020 as a result of the
manufacturing arrangement described above.
Research and Development Expense (in thousands, except percentages)
Increase/ Percentage Increase/
(Decrease) (Decrease)
Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Research and development expense $ 96,436 $ 106,686 $ (10,250) (10) %



Increase/ Percentage Increase/
(Decrease) (Decrease)
Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Research and development expense $ 205,423 $ 225,149 $ (19,726) (9) %


Research and development expense consists primarily of clinical study costs,
contract manufacturing costs, direct costs of outside research, materials,
supplies, licenses and fees as well as personnel costs (including salaries,
benefits, and stock-based compensation). Research and development expense also
includes certain overhead allocations consisting of support and
facilities-related costs. Where we perform research and development activities
under a clinical joint development collaboration, such as our collaboration with
BMS, we record the expense reimbursement from our partners as a reduction to
research and development expense, and we record our share of our partners'
expenses as an increase to research and development expense.
Research and development expense decreased for the three and six months ended
June 30, 2020 compared to the three and six months ended June 30, 2019 primarily
due to pre-commercial manufacturing costs for NKTR-181 that we incurred during
the three and six months ended June 30, 2019. Although we continued
pre-commercial manufacturing activities for NKTR-181 during 2019 and early 2020,
we present the costs of these activities for the six months ended June 30, 2020
in the Impairment of assets and other costs related to terminated program line
in our Condensed Consolidated Statements of Operations as a result of our
decision to withdraw our NDA for NKTR-181. The costs of our clinical development
program, including bempegaldesleukin, NKTR-358, NKTR-262 and NKTR-255, were
consistent between the three and six months ended June 30, 2020 compared to the
three and six months ended June 30, 2019. During the three and six months ended
June 30, 2020, we recorded net reductions to research and development expense
for BMS's reimbursements of our costs of $33.9 million and $65.1 million,
respectively. During the three and six months ended June 30, 2019, we recorded
net reductions to research and development expense for BMS's reimbursements of
our costs of $24.6 million and $53.4 million, respectively. Under the BMS
Collaboration Agreement, BMS generally bears 67.5% of development costs for
bempegaldesleukin in combination with Opdivo® and 35% of costs for manufacturing
bempegaldesleukin. Please see Note 6 to our Condensed Consolidated Financial
Statements for additional information regarding our BMS Collaboration Agreement.
We expect research and development expense to increase for 2020 compared to 2019
primarily as a result of advancing development of bempegaldesleukin under the
BMS Collaboration Agreement. In addition, we are collaborating with Lilly to
develop NKTR-358, and Lilly is planning additional studies, which are expected
to begin in 2020, for which we are responsible for 25% of costs. We are
continuing to enroll patients in a dose-escalation Phase 1/2 study for NKTR-262
in combination with bempegaldesleukin. We are also continuing our Phase 1
dose-escalation studies for NKTR-255 in multiple myeloma and non-Hodgkin
lymphoma. The timing and amount of our future clinical investments will vary
significantly based upon our evaluation of ongoing clinical results and the
structure, timing, and scope of potential collaboration partnerships (if any)
for these programs.
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In addition to our drug candidates that we plan to evaluate in clinical
development during 2020 and beyond, we believe it is vitally important to
continue our substantial investment in a pipeline of new drug candidates to
continue to build the value of our drug candidate pipeline and our business. Our
discovery research organization is identifying new drug candidates by applying
our polymer conjugate technology platform to a wide range of molecule classes,
including small molecules and large proteins, peptides and antibodies, across
multiple therapeutic areas. We plan to continue to advance our most promising
early research drug candidates into preclinical development with the objective
to advance these early stage research programs to human clinical studies over
the next several years.

Our expenditures on current and future preclinical and clinical development
programs are subject to numerous uncertainties in timing and cost to completion.
In order to advance our drug candidates through clinical development, each drug
candidate must be tested in numerous preclinical safety, toxicology and efficacy
studies. We then conduct clinical studies for our drug candidates that take
several years to complete. The cost and time required to complete clinical
trials may vary significantly over the life of a clinical development program as
a result of a variety of factors, including but not limited to:
•the number of patients required for a given clinical study design;
•the length of time required to enroll clinical study participants;
•the number and location of sites included in the clinical studies;
•the clinical study designs required by the health authorities (i.e. primary and
secondary endpoints as well as the size of the study population needed to
demonstrate efficacy and safety outcomes);
•the potential for changing standards of care for the target patient population;
•the competition for patient recruitment from competitive drug candidates being
studied in the same clinical setting;
•the costs of producing supplies of the drug candidates needed for clinical
trials and regulatory submissions;
•the safety and efficacy profile of the drug candidate;
•the use of clinical research organizations to assist with the management of the
trials; and
•the costs and timing of, and the ability to secure, approvals from government
health authorities.
Furthermore, our strategy includes the potential of entering into collaborations
with third parties to participate in the development and commercialization of
some of our drug candidates such as those collaborations that we have already
completed for bempegaldesleukin, NKTR-358 and MOVANTIK®. In certain situations,
the clinical development program and process for a drug candidate and the
estimated completion date will largely be under the control of that third party
and not under our control. We cannot forecast with any degree of certainty which
of our drug candidates will be subject to future collaborations or how such
arrangements would affect our development plans or capital requirements.
As noted above, the evolving situation around the COVID-19 pandemic has had
varying impacts on the clinical testing of our proprietary drug candidates
depending on the therapeutic indication, geographic distribution of clinical
trial sites, the clinical trial stage, and, in certain cases, our partners'
general corporate approach to the pandemic. We currently believe that we could
experience delays of approximately three months for earlier stage Nektar-run
clinical studies (such as the Phase 1/2 trial studying bempegaldesleukin and
pembrolizumab in NSCLC). In addition, for certain clinical studies involving our
proprietary drug candidates that are run by our partners, study timelines are
estimated to be delayed at least three to six months. As a result of these
delays and potential delays, we may incur additional costs associated with these
clinical trials. At this time, we cannot estimate if such increases would have a
material effect on our results of operations or financial position.
The risks and uncertainties associated with our research and development
projects are discussed more fully in Item 1A. Risk Factors. As a result of the
uncertainties discussed above, we are unable to determine with any degree of
certainty the duration and completion costs of our research and development
projects, anticipated completion dates or when and to what extent we will
receive cash inflows from a collaboration arrangement or the commercialization
of a drug candidate.

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General and Administrative Expense (in thousands, except percentages)
Increase/ Percentage Increase/
(Decrease) (Decrease)
Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
General and administrative expense $ 24,347 $ 22,581 $ 1,766 8 %



Increase/ Percentage Increase/
(Decrease) (Decrease)
Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
General and administrative expense $ 50,564 $ 47,587 $ 2,977 6 %


General and administrative expense includes the cost of administrative staffing,
commercial, finance and legal activities. General and administrative expense
increased during the three and six months ended June 30, 2020 compared with the
three and six months ended June 30, 2019. We expect general and administrative
expenses in the full year of 2020 to increase compared to 2019, primarily due to
increased personnel costs as we begin a stage appropriate build of our
commercial capability to launch and co-commercialize bempegaldesleukin with BMS
as early as 2021. At this time, we do not anticipate that the effects of the
COVID-19 pandemic will materially affect our general and administrative expense.
Impairment of Assets and Other Costs for Terminated Program
On January 14, 2020, the joint FDA Anesthetic Drug Products Advisory Committee
and Drug Safety and Risk Management Committee did not recommend approval of our
NDA for NKTR-181. As a result, we withdrew our NDA and decided to make no
further investments in this program. On February 26, 2020, the Audit Committee
of our Board of Directors approved management's plan for the wind-down of
Inheris and the NKTR-181 program.
As a result, in the three months ended March 31, 2020, we wrote off $19.7
million
of advance payments to contract manufacturers for commercial batches of
NKTR-181. We also incurred $25.5 million of additional costs, primarily for
non-cancellable commitments to our contract manufacturers and certain severance
costs.
Interest Expense (in thousands, except percentages)
Increase/ Percentage Increase/
(Decrease) (Decrease)
Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Interest expense $ 647 $ 5,231 $ (4,584) (88) %



Increase/ Percentage Increase/
(Decrease) (Decrease)
Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Interest expense $ 6,851 $ 10,457 $ (3,606) (34) %


Interest expense during the three and six months ended June 30, 2020 and 2019
primarily consisted of interest from our senior secured notes. In October 2015,
we issued $250.0 million in aggregate principal amount of 7.75% senior secured
notes due October 2020. Interest on the 7.75% senior secured notes was
calculated based on actual days outstanding over a 360 day year. On April 13,
2020
, we redeemed the senior secured notes at par and therefore repaid the
principal of $250.0 million and accrued interest of $4.8 million. After the
repayment, we incurred no interest expense. Accordingly, interest expense for
the three and six months ended June 30, 2020 decreased as compared to the three
and six months ended June 30, 2019.

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Non-Cash Royalty Revenue and Non-Cash Interest Expense
Increase/ Percentage Increase/
(Decrease) (Decrease)
Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Non-cash royalty revenue related to
sale of future royalties $ 7,684 $ 9,091 $ (1,407) (15) %
Non-cash interest expense on liability
related to sale of future royalties 6,691 5,975 716 12 %



Increase/ Percentage Increase/
(Decrease) (Decrease)
Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Non-cash royalty revenue related to
sale of future royalties $ 17,579 $ 17,321 $ 258 1 %
Non-cash interest expense on liability
related to sale of future royalties 13,659 12,040 1,619 13 %


For a discussion of the sale of future royalties for CIMZIA® and MIRCERA®, see
Note 4 to our Condensed Consolidated Financial Statements.
As discussed in Note 4, we continue to recognize non-cash royalty revenue for
net sales of CIMZIA® and MIRCERA®, which was consistent for the six months ended
June 30, 2020 and June 30, 2019. Non-cash interest expense increased for the
three and six months ended June 30, 2020 compared with the three and six months
ended June 30, 2019 due to an increase in the estimated implicit interest rate
over the life of the transaction. When forecasted future revenues rise, this
results in an increase to the estimated implicit interest rate over the life of
the transaction, which, in turn, increases the prospective effective interest
rate in the current and future periods.
We recognized non-cash interest expense at an effective rate of 29% for the
three and six months ended June 30, 2019, reflecting the estimated implicit
interest rate over the life of the transaction of approximately 18.7%. During
the fourth quarter of 2019, due to sustained increases in the forecasted sales
of CIMZIA® and MIRCERA®, we increased our estimated implicit interest rate over
the life of the agreement from 18.7% to approximately 19.5%, which resulted in a
prospective interest rate of 38%. The rate remained unchanged during the three
and six months ended June 30, 2020.
Over the term of this arrangement, the net proceeds of the transaction of $114.0
million
, consisting of the original proceeds of $124.0 million, net of $10.0
million
in payments from us to RPI, is amortized as the difference between the
non-cash royalty revenue and the non-cash interest expense. To date, we have
amortized $44.4 million of the net proceeds. We periodically assess future
non-cash royalty revenues, and we may adjust the prospective effective interest
rate based on our best estimates of future non-cash royalty revenue such that
future non-cash interest expense will amortize the remaining $69.6 million of
the net proceeds. There are a number of factors that could materially affect our
estimated interest rate, in particular, the amount and timing of royalty
payments from future net sales of CIMZIA® and MIRCERA®. As a result, future
interest rates could differ significantly, and we will adjust any such change in
our estimated interest rate prospectively. At this time, we cannot estimate the
effects of the COVID-19 pandemic on net sales of CIMZIA® and MIRCERA® and the
resulting effects on our non-cash royalty revenue and potential effects on our
estimated implicit rate for non-cash interest expense.


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Interest Income and Other Income (Expense), net (in thousands, except
percentages)
Increase/ Percentage Increase/
(Decrease) (Decrease)
Three Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Interest income and other income
(expense), net $ 5,191 $ 11,989 $ (6,798) (57) %



Increase/ Percentage Increase/
(Decrease) (Decrease)
Six Months Ended June 30, 2020 vs. 2019 2020 vs. 2019
2020 2019
Interest income and other income
(expense), net $ 13,543 $ 24,472 $ (10,929) (45) %


Interest income and other income (expense) decreased for the three and six
months ended June 30, 2020 compared to the three and six months ended June 30,
2019
due to lower investment balances which have been utilized to fund our
operations and the repayment of our senior notes on April 13, 2020, as well as
decreases in market interest rates. We expect that our interest income and other
income (expense), net will decrease for 2020 compared to 2019 for these same
reasons. Additionally, due to the COVID-19 pandemic, the effective interest rate
earned on new investments purchased as existing securities in our portfolio
mature has been lower than historical interest rates and we expect this trend to
continue.
Liquidity and Capital Resources
We have financed our operations primarily through revenue from product sales,
royalties and strategic collaboration agreements, as well as public offering and
private placements of debt and equity securities. At June 30, 2020, we had
approximately $1.2 billion in cash and investments in marketable securities. As
noted above, on April 13, 2020, we repaid the principal and accrued interest of
our senior notes totaling $254.8 million.
We estimate that we have working capital to fund our current business plans for
the next twelve months. We expect the clinical development of our proprietary
drug candidates including bempegaldesleukin, NKTR-358, NKTR-262 and NKTR-255
will continue to require significant investment to continue to advance in
clinical development with the objective of entering into a collaboration
partnership or obtaining regulatory approval. In the past, we have received a
number of significant payments from collaboration agreements and other
significant transactions. In April 2018, we received a total of $1.85 billion
from BMS including a $1.0 billion upfront payment and an $850.0 million premium
investment in our common stock. In July 2017, we entered into a collaboration
agreement for NKTR-358 with Lilly, under which we received a $150.0 million
upfront payment. In the future, we expect to receive substantial payments from
our collaboration agreements with BMS and Lilly and other existing and future
collaboration transactions if drug candidates in our pipeline achieve positive
clinical or regulatory outcomes. In particular, under the BMS Collaboration
Agreement, we are entitled to $1.455 billion of clinical, regulatory and
commercial launch milestones (of which, we have received $25.0 million). Of the
remaining milestones, $625.0 million are associated with approval and launch of
bempegaldesleukin in its first indication in the U.S., EU and Japan (which
reflects the reduction for the $25.0 million nonrefundable, creditable milestone
for the first patient, first visit in the muscle-invasive bladder cancer trial
that BMS paid to us in March 2020). As a result, whether and when
bempegaldesleukin is approved in any indication will have a significant impact
on our future liquidity and capital resources. We have no credit facility or any
other sources of committed capital.
In the short term, we do not anticipate that the effects of the COVID-19
pandemic will have a material effect on our results of operations or financial
position since we do not generate significant cash flows from recurring revenues
and our revenues are generally less affected by shelter-in place or similar
orders. However, if the effects of the COVID-19 pandemic delay the commencement
or enrollment of patients in our clinical trials, the completion of these trials
may also be delayed, which in turn may delay our ability to file for regulatory
approval and commercialize these products (if approved) or enter into
collaboration agreements.
Due to the potential for adverse developments in the credit markets, we may
experience reduced liquidity with respect to some of our investments in
marketable securities. These investments are generally held to maturity, which,
in accordance with our investment policy, is less than two years. However, if
the need arises to liquidate such securities before maturity, we may experience
losses on liquidation. To date we have not experienced any liquidity issues with
respect to these securities. We believe that, even allowing for potential
liquidity issues with respect to these securities and the effect of the COVID-19
pandemic on the
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financial markets, our remaining cash and investments in marketable securities
will be sufficient to meet our anticipated cash needs for at least the next
twelve months.
Our current business plan is subject to significant uncertainties and risks as a
result of, among other factors, clinical and regulatory outcomes for
bempegaldesleukin, the sales levels of our products, if and when they are
approved, the sales levels for those products for which we are entitled to
royalties, clinical program outcomes, whether, when and on what terms we are
able to enter into new collaboration transactions, expenses being higher than
anticipated, unplanned expenses, cash receipts being lower than anticipated, and
the need to satisfy contingent liabilities, including litigation matters and
indemnification obligations.
The availability and terms of various financing alternatives, if required in the
future, substantially depend on many factors including the success or failure of
drug development programs in our pipeline. The availability and terms of
financing alternatives and any future significant payments from existing or new
collaborations depend on the positive outcome of ongoing or planned clinical
studies, whether we or our partners are successful in obtaining regulatory
authority approvals in major markets, and if approved, the commercial success of
these drugs, as well as general capital market conditions. We may pursue various
financing alternatives to fund the expansion of our business as appropriate.
Cash flows from operating activities
Cash flows used in operating activities for the six months ended June 30, 2020
totaled $162.0 million, which includes $177.3 million of net operating cash uses
as well as $9.7 million for interest payments on our senior secured notes,
partially offset by the receipt of the $25.0 million milestone payment from BMS
for the achievement of the first patient, first visit in the registrational
muscle invasive bladder cancer trial.
Cash flows used in operating activities for the six months ended June 30, 2019
totaled $134.8 million, which includes $135.3 million of net operating cash uses
as well as $9.5 million for interest payments on our senior secured notes,
partially offset by the receipt of a $10.0 million sales milestone payment from
our collaboration agreement with Baxalta.
We expect that cash flows used in operating activities, excluding upfront,
milestone and other contingent payments received, will increase in the full year
of 2020 compared to 2019 primarily as a result of increased research and
development expenses.
Cash flows from investing activities
We paid $3.6 million and $17.3 million for the purchase or construction of
property, plant and equipment in the six months ended June 30, 2020 and 2019,
respectively. The decrease for the six months ended June 30, 2020 compared with
the six months ended 2019 resulted from the construction of leasehold
improvements at our facilities lease in San Francisco during 2019. We expect our
capital expenditures in the full year of 2020 to decrease compared with 2019,
primarily due to the completion of the construction of these leasehold
improvements.
During the six months ended June 30, 2020, our maturities and sales of
investments, net of purchases, totaled $358.4 million, which we used to redeem
our senior notes and accrued interest of $254.8 million and to fund our
operations.
Cash flows from financing activities
We received proceeds from issuance of common stock related to our employee
option and stock purchase plans of $19.1 million and $12.2 million in the six
months ended June 30, 2020 and 2019, respectively.
On April 13, 2020, we repaid the principal of our senior notes totaling $250.0
million
. See Note 1 to our Condensed Consolidated Financial Statements for
additional information.
Contractual Obligations
Other than the repayment of our senior notes, there were no material changes
outside the ordinary course of business during the six months ended June 30,
2020
to the summary of contractual obligations included in our Annual Report on
Form 10-K for the year ended December 31, 2019 on file with the SEC.
Off-Balance Sheet Arrangements
We do not utilize off-balance sheet financing arrangements as a source of
liquidity or financing.
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